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Lufthansa Board Stares Down Investors in Chairman Dispute

Wolfgang Mayrhuber, former chief executive officer of Deutsche Lufthansa AG. Investors had criticized Mayrhuber’s nomination to the board, saying he already held too many similar posts and had not kept his distance from the German airline long enough to comply with acceptable standards of corporate governance. Photographer: Ralph Orlowski/Bloomberg

May 7 (Bloomberg) -- The decision by Deutsche Lufthansa
AG’s supervisory board to back Wolfgang Mayrhuber’s aspirations
to become chairman against investor opposition shows the hurdles
in dismantling the chief executive-to-chairman German model.

Mayrhuber, the German airline’s chief executive officer
until 2010, renewed his candidacy yesterday to join the board,
less than 12 hours after saying he’d back out following
criticism from some shareholders. Mayrhuber, 66, changed his
mind after the board voiced its “repeated wish” for him to run
and key shareholders gave their blessing, the airline said.

The back and forth in the Lufthansa boardroom laid bare the
growing tensions between investors no longer willing to accept
the previously common transition of executives to the
supervisory panel, and a board that had to offset Mayrhuber’s
years of expertise against a code of conduct demanding a clearer
demarcation line between the two management spheres.

“There has been considerable confusion, caused by blind
interpretation of governance regulation,” Chairman Juergen
Weber said today. “This confusion was uncalled for. Wolfgang
Mayrhuber has been attacked in a polemic fashion. I repudiate
such behavior to the utmost. He has the full trust of the
supervisory board, and his achievements are beyond question.”

Keeping Distance

Investors had criticized Mayrhuber’s nomination, saying
parts of his strategy as CEO failed and complaining he already
held too many similar posts and had not kept his distance from
the German airline long enough to comply with acceptable
standards of corporate governance. Lufthansa said yesterday such
criticism prompted Mayrhuber to drop out of the running, one day
before he was due to be voted chairman.

The majority of Lufthansa’s 10 biggest institutional
shareholders are international, including Blackrock Inc., which
holds 5.4 percent, and Templeton Global Advisors Ltd with a
stake of 5 percent, according to the company. The shares more
than doubled during Mayrhuber’s tenure, while adding about 3
percent since current CEO Franz took over.

Mayrhuber’s comeback is an unprecedented volte-face in
Germany’s corporate history, where investors have become more
vocal in their opposition to managers accumulating board
mandates. Holding multiple posts was common practice in the
previously intertwined corporate landscape known as Germany Inc.

Karl-Ludwig Kley, the CEO of German drug maker Merck KGaA,
also stands for election to the supervisory board today. Kley
was Lufthansa CFO from 1998 to 2006.

No Future

“We’re speechless,” Ingo Speich, a fund manager at Union
Investment, said at the shareholder meeting today. “Mr.
Mayrhuber and his former companion Mr. Kley represent the old
world of Lufthansa, which must be seen as failed and has no
future. Responsible corporate governance calls for you not to
accept this nomination.”

A voluntary code of conduct now requires CEOs wait two
years before they ascend to the supervisory panel, and caps the
number of permitted mandates. Mayrhuber serves as chairman at
German chipmaker Infineon Technologies AG, and also sits on the
supervisory boards of companies including Munich Re and
Bayerische Motoren Werke AG.

Leadership of companies is divided into an executive board
overseen by the CEO, and a supervisory board led by a chairman.
The supervisory board is split halfway between managers
representing the capital side and delegates from trade unions
and works councils who voice workers’ demands.

Natural Step

Moving from the executive suite to the supervisory board
was previously a natural trajectory at Germany’s largest
companies, with long-time leaders such as Siemens AG CEO
Heinrich von Pierer seamlessly switching to the senior panel,
whose role it is to sign off on strategy, hire and dismiss
executives and set their pay.

Activist investors have since criticized the practice,
saying a chairman who until recently ran the company is less
likely to agree to necessary changes without undermining his own
legacy. Mayrhuber was succeeded at Lufthansa by Christoph Franz,
who has since embarked on a sweeping overhaul that includes the
renewal of the fleet and job cuts.

Germany’s postwar system of cross-shareholdings and
interlinked boards began falling apart about a decade ago when
banks and insurers started selling their holdings in the
nation’s companies, after the government in 2000 got rid of a
tax of as much as 54 percent on asset sales.

Old Guard

With the untangling of the corporate web came louder calls
from investors to also separate the management layers. Josef
Ackermann withdrew plans in November 2011 to immediately head
Deutsche Bank AG’s supervisory board after his time as CEO,
bowing to shareholder criticism.

Gerhard Cromme, one of the authors of Germany’s current
code of corporate conduct, stepped down from the helm of
ThyssenKrupp AG’s supervisory board in March, after resisting
calls to resign at the steelmaker’s AGM in January in the
biggest rebellion in the 14-year history of the merged company.

Today, those CEOs who slipped directly into the role of
chairman are a rarer breed in Germany. Among them is Ferdinand
Piech of Volkswagen AG, whose family is a key shareholder in the
German carmaker. Klaus-Peter Mueller is chairman at Commerzbank
AG, where he served as CEO until 2008.

If Mayrhuber is elevated to chairman today, he will face
the challenge of injecting his experience while watching his
successor pick apart parts of his former strategy. Franz has
sold assets including the BMI carrier that failed to blossom
under Mayrhuber, and he’s spending billions to renew a fleet
that includes dozens of the unpopular Airbus A340.

Ultimately, Mayrhuber’s years of service for the airline
make him the right choice, said Ulrich Hocker, president of DSW,
Germany’s largest private investors association.

“He’s an expert, and that’s rare in this industry,”
Hoecker said. Yesterday’s maneuvers are “a first in Germany,
I’ve never seen foreign investors influence supervisory board
elections in such a manner.”